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Title Optimal Partial and Full Disability Insurance with
Author Kyung-woo Lee (Yonsei University)
Volume 35 Number 1
Pages 61-107 
Keywords Disability Insurance, Partial Disability, Full Disability, Korea
Abstract In this paper, I investigate the optimal disability insurance (DI) when partial and full
disability are privately observed over the life cycle. I demonstrate that in the social optimum,
partially disabled agents are induced to supply labor despite substantial government transfers
unless labor supply is relatively elastic and their productivity is significantly reduced. I then
apply the framework to quantitatively evaluate Koreas DI programs, which include partial
and full disability benefits. In the calibrated model, I find that welfare gains from replacing
Koreas DI programs with the corresponding optimal system amount to a 1.17% increase in
consumption. Such a reform significantly raises the utility of both types of disabled agents at
relatively small utility costs of able agents. Equity gains from this redistribution account for
73.4% of the total welfare gains, whereas efficiency gains from the optimal allocation
account for 26.6%.
File KER-20190101-35-1-03.pdf
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